NEW YORK -(Dow Jones)- Higher commodity costs will dent Procter & Gamble Co. (PG) earnings by $1 billion in current fiscal year, double what it expected earlier.
P&G's sobering assessment of rising worldwide commodity costs came after the world's largest consumer products company saw gross margins fall to 51.8% in its second-quarter, down from 53.7% a year earlier. P&G's spot prices for production materials and energy are up more than 20% from last year, Chief Financial Officer Jon Moeller said Thursday.
The higher costs come as P&G still grapples with weak demand for products in developed markets like the U.S. and Western Europe, where the economic recovery has lagged growth in emerging markets. P&G plans to offset the higher costs by raising prices in some markets and trying to sell more higher priced items.
"In terms of ability to pass through, we're really in a good position on that regard," P&G Chief Executive Bob McDonald said on an investor call.
For the quarter, P&G's profit fell 28%, largely due to a large gain in the prior year period from the sale of its global pharmaceutical business. The profit was ahead of expectations for the quarter, though analysts said results were boosted by a lower tax rate.
P&G also forecast fiscal third-quarter earnings of 95 cents to $1 a share, with total sales expected to rise 5% to 7%. Analysts surveyed by Thomson Reuters expected a profit of 99 cents on $20.12 billion in sales, or up 5%. The company did maintain its full-year targets.
P&G shares were down 2.9% in recent trading to $64.20, the second largest drop on the Dow Jones Industrial Average after AT&T Inc. (T).
Fellow consumer product stalwart Colgate-Palmolive Co. (CL) also saw shares drop Thursday after the toothpaste maker reported a 1.1% in fourth-quarter earnings which were hurt by weak sales. Colgate shares were down 2.2% to $78.28.
P&G says the sales volumes are improving and that it continues to pick up market share in most regions, but concerns about its larger developed market weighed on investors. Volumes grew double digits in developing markets and low-single digits in developed regions.
Sales lost some steam toward the end of its latest quarter, as consumers turned more frugal after exhausting money on holiday spending.
P&G was seeing some promising signs in the U.S., including a willingness by consumers to spend money on new premium items, like Gillette Fusion Razors.
"We're seeing demand for premium innovation that frankly exceeded our expectations," McDonald said, adding that shoppers trading down to lower priced items has declined dramatically.
Though commodity costs are pressuring results, McDonald said that prices were about even from where they were a year ago in the latest quarter. The company plans to raise some prices soon, including on Duracell batteries starting in March.
It's also raising prices on some items overseas, like in Venezuela and on Tide Plus in India, due to currency fluctuations to "protect the structural economics of our business," McDonald said.
For the quarter ended Dec. 31, P&G posted a profit of $3.33 billion, or $1.11 a share, down from $4.66 billion, or $1.49 a share, a year earlier. Excluding charges pending legal matters in Europe in both periods and a discontinued operations gain in the prior period, core earnings grew to $1.13 from $1.10. Revenue climbed 1.5% to $21.35 billion.
In October, the company projected earnings from continuing operations of $1.05 to $1.11 on 2% to 4% net sales growth.
Sales grew 1% in the beauty segment, a business that was overhauled in 2009 in one of the biggest shake-ups in P&G history. Increases were also seen at the grooming, health care, and baby care and family care segments. Sales of snacks and pet care slid 4%.
--John Kell contributed to this article.
Order free Annual Report for Procter & Gamble Co.
Visit http://djnewswires.ar.wilink.com/?link=PG or call 1-888-301-0513
Copyright © 2011 Dow Jones Newswires